Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?

Tax

Cyprus

Article 33 of the Income Tax Law gives the tax authorities power to adjust taxable profits if they consider that they have been affected by transactions between related parties undertaken other than on an arm’s length basis. There is no detailed guidance on how this provision is to be applied in practice. However, the Tax Rulings Division of the Tax Department will, on application by or on behalf of a taxpayer, issue advance tax rulings regarding actual transactions (for brevity this should be understood as including a series of transactions) relating to tax years for which the due date for filing a tax return has not yet passed, and transactions proposed to be undertaken by existing or new entities. Rulings will be binding only with regard to the taxpayers specifically mentioned in the ruling request, and only to the extent that the facts and circumstances presented in the ruling request continue to be applicable and provided that there is no subsequent change in the tax law which renders the ruling inapplicable. The Tax Rulings Division will express an opinion on the applicable tax treatment of the hypothetical transaction or scenario presented to it and will not be responsible for verifying the facts presented by the applicant.

There is nothing in the wording of the circular regarding tax rulings that would prevent a ruling being applied for regarding proposed transfer prices, but given the controversy currently surrounding the issue, the Tax Department is likely to adopt a very cautious approach.

Greece

Yes, the transfer pricing regime is provided in articles 21 and 22 of the Code of Tax Procedure. The Greek provisions on transfer pricing apply not only to the sale of goods and the provision of services, but also to the transfer of shares, real estate etc. Article 21 provides the obligation of affiliated enterprises or even those enterprises which have the possibility of substantial influence in one of the associated companies, - including the permanent establishment in Greece of foreign enterprises (for their transactions with their central department), as well as domestic legal entities for their transactions with their permanent establishments abroad - to keep a transfer pricing documentation file. According to the Article 21, many transactions or transfers are exempted from the above obligation depending on their amount or the companies’ turnover.

The aforementioned affiliated entities may submit before the General Secretariat an application for the advance approval of the methods applied for the pricing of certain, future, cross- border transactions with the affiliated entities. The decision of the General Secretariat upon the application is issued within 120 days from the submission and it lasts for 4 years. The decision may be revised, by the General Secretariat or withdrawn or cancelled by the Tax Administration accordingly.

No official reactions have been publicised in reference to the Starbucks and Apple cases.

Turkey

Yes.

United Kingdom

The UK transfer pricing (TP) regime is contained in Parts 4 and 5 of TIOPA 2010. The UK TP regime must be considered in light of the recently implemented Diverted Profits Tax (DPT) rules, which were introduced by the Finance Act 2015. There is also an advanced pricing agreement (APA) programme through which unilateral, bilateral and multilateral APAs can be obtained. The process by which such an agreement can be obtained is detailed in HMRC’s Statement of Practice 2/2010. HMRC will determine the taxpayer’s DPT position before agreeing to an APA.

As a result of the Starbucks and Apple decisions, any business which has secured a favourable APA in the EU could, potentially, be at risk of having those arrangements reviewed under the State Aid rules and be faced with having to make significant payments to repay tax benefits received under APAs that, allegedly, do not comply with State Aid rules. The UK has made no formal reaction to the Starbucks and Apple decisions. It is anticipated that APAs will generally be more difficult to obtain until the ECJ has ruled upon those cases.

Mexico

Generally speaking, Mexican transfer pricing rules have been adapted to the OECD guidelines on the subject. In this regard, transfer pricing rules would be applicable concerning transactions between related parties. That is, the corresponding transaction should abide by the arm’s-length principle.

Moreover, concerning transactions between a Mexican tax resident and a non-related foreign tax resident, the first would be required to determine its accruable income and authorised deductions bearing in mind that the price and compensation for the relevant transaction should be equal to that which would have been paid to an independent party (arm’s-length principle).

It is worth mentioning that in terms of the applicable Mexican laws, it is possible to obtain an advanced pricing agreement. Nevertheless, the issuance of the corresponding resolution could take from two to three years.

Gibraltar

The ITA provides for the anti-avoidance provisions to be construed in accordance with the OECD standards. Whilst there has previously been a practice of providing advance tax rulings on the liability to corporate tax in Gibraltar, these rulings are no longer provided. In addition, 165 tax rulings provided by the Income Tax Office are currently the subject of formal investigation by the European Commission.

Japan

Yes. Generally, the Japanese government is of the position that Japanese transfer pricing rules as well as enforcement thereof should closely follow the OECD standards. For example, Japanese transfer pricing rules recently repealed priority of the three basic methods (CUP, RP and CP) over other methods (PS and TNMM), and adopted the “best method” rule. In addition, it has been made clear that the concept of a “range” of arm’s length profit level can be used for Japanese transfer pricing purposes (provided that it means a “full range” predicated upon full comparability, rather than the statistical approach of interquartile range) for the purpose of issuing a transfer pricing assessment. In addition, as a matter of enforcement or transfer pricing audit, it is very common that taxpayers make defensive arguments by referring to the OECD Guidelines along with Japanese local laws and regulations, and the Japanese tax authority generally accepts such arguments as legitimate. Indeed, some tax treaties, e.g., that with the United States, expressly provide that transfer pricing enforcement shall be made in accordance with the OECD Guidelines.

It is possible to obtain an advance pricing arrangement (APA) from the tax authority, and it is a very common practice. However, as an APA requires substantial time, cost and burden to deal with the tax authority (e.g., for responding to information and document requests), taxpayers generally concentrate on intra-group transactions that have significant volume and a large amount of tax at stake in applying for an APA. It is not rare that an APA takes two or three years until concluded.

United States

Yes. The U.S. has detailed and comprehensive rules governing transfer pricing in Section 482 of the tax code and the regulations promulgated thereunder. Taxpayers may obtain a unilateral, bilateral or multilateral APA.

Hong Kong

There is currently no formal transfer pricing regime in Hong Kong but the tax authorities take the view that various provisions of the Inland Revenue Ordinance, alone or together in any combination, allow them to proceed to transfer pricing adjustments. Hong Kong has recently announced that it would introduce a formal transfer pricing regime in complying with the OECD BEPS initiative.

The tax authorities encourage APAs but they have not been particularly popular and it is now proposed to strengthen APA regime by providing a formal statutory basis to (i) allow for transfer pricing issues in an APA, (ii) provide better legal certainty, (iii) clarify the rights and obligations of the tax authorities and taxpayers in relation to an APA, (iv) extend existing penalties to APA application or post-APA audits and investigations, (v) charge a fee upon APA application.

Spain

Yes, the Corporate Income Tax Act includes a regime for transactions between related parties which must be agreed at arm's length. It is possible to obtain an advance price agreement through a procedure set out in said Act.

There has not been any official reaction from the Spanish Tax Authorities in relation to the Starbucks or Apple decisions.

Austria

Taxpayers may request binding advance rulings on transfer pricing. Regarding tax abuse of intra group interest and royalty payments (Apple, Starbucks) Austria has implemented the rule that interest and royalty payments paid to related companies resident in low tax jurisdictions are not tax deductible in Austria.

Germany

Yes, generally speaking, prices and terms and conditions agreed on for transactions between related parties will be accepted for tax purposes only in cases where the arm’s-length principle is met. Specific statutory regulations outline how the arm’s-length principle has to be applied. For example, the law provides for the statutory prioritization of the comparable uncontrolled price, resale minus and cost plus methods. If, possibly after adjustments, the values obtained are fully comparable with the tested transaction prices, the full range of such arm’s-length values can be used. There are also specific rules on determining the hypothetical arm’s-length price for the transfer of functions (business restructurings in OECD terminology).

Germany has statutory transfer pricing documentation requirements. Documentation must be presented upon request by the tax authorities within 60 days in case of ordinary business transactions and within 30 days in case of extraordinary business transactions (e.g., business restructurings). For extraordinary business transactions, transfer pricing documentation has to be prepared contemporaneously. There are penalties in case of failure. The statute also establishes a rebuttable presumption that the income of the German company has been reduced by inappropriate transfer prices. In addition, tax authorities are authorized to adjust transfer prices to the least favorable end of the arm’s-length range. Germany has introduced country-by-country reporting in line with Action 13 of the BEPS project of the OECD at the end of 2016. In addition to the local file, starting 2017, taxpayers have to prepare a master file if its revenue exceeded EUR 100 m in the previous year. The master file shall provide an overview of the group’s worldwide operations and overall transfer price policy.

Both unilateral advance rulings and bilateral /multilateral Advance Pricing Agreements (APAs) are available in Germany. However, the Federal Ministry of Finance issued administrative regulations stipulating that in cases where a double tax treaty contains a clause on mutual agreement procedures with the country of the foreign enterprise, the German taxpayer should not be granted a unilateral advance ruling but advance rulings may only be obtained by way of bilateral APA.

In connection with the implementation of legislative changes based on the OECD BEPS recommendations, Germany just recently introduced rules for the automatic exchange of cross-border tax rulings and APAs on transfer prices between multinational companies. There are no official statements on how the German tax authorities are going to deal with unilateral rulings on transfer prices and APAs in light of the Starbucks and Apple decisions. By law, they have to treat each case individually. A certain level of bias with respect to similar structures can, however, not be ruled out.

Belgium

Yes, as a general rule prices and conditions agreed on between related parties will be accepted for tax purposes only in so far as the ‘arm’s length’ principle is met. A transaction between related companies may be adjusted if the companies agree on conditions that would not be agreed on between unrelated parties.

Economic double taxation caused by a transfer pricing adjustment may be limited under Belgium’s income tax treaties that contain a provision similar to Art. 9(2) of the OECD Model Convention. Within the European Union, economic double taxation of profits caused by transfer pricing adjustments made by the tax authorities may be dealt with under the Arbitration Convention.

Several specific anti-avoidance measures exist to prevent transfer pricing that is not in accordance with the ‘arm’s length’ principle. Interest, royalties and fees paid to a non-resident company or any other recipient in a tax haven may be disallowed as deductible expenses unless the taxpayer proves that the transaction is real and genuine and that the payments are not excessive. The transfer of certain assets (bonds, claims, patents, money, etc.) to a company or any other person in a tax ‘haven’ may be disregarded by the tax authorities, except if the taxpayer shows that the transaction corresponds to legitimate business needs or that he or she received an actual consideration that produced an amount of income subject in Belgium to a normal tax burden.

Following the anti-BEPS recommendation, additional transfer pricing documentation rules apply to accounting years starting from January 1st, 2016. In general, the required transfer pricing documentation consists of: a master file, a local file and a country-by-country report. These documents must be prepared by groups that meet a well-defined threshold. In terms of timing, both the master file and the country-by-country report must be filled in within a 12 month period following the closing date of the group’s financial accounts. The local file must be submitted together with the tax returns of the Belgian entities. Penalties from EUR 1,250 to EUR 25,000 may apply in the case of non-compliance.

To determine an ‘arm’s length’ price, the generally-acknowledged methods may be used, such as the comparable uncontrolled price method (‘CUP’), the resale price method or the cost-plus method.

In any event, unilateral advance rulings are available in Belgium. A clear legal framework regulates the relevant procedure. They are published without the taxpayers’ names being revealed.

Italy

Business income of an Italian resident company arising from transactions entered into with a non-Italian resident company belonging to the same group is determined on the basis of the normal market value (arm's length value) of the goods transferred, services rendered, or goods and services received as opposed to the value actually agreed by the parties, if an increase in the taxable income would arise from so doing.

Starting from 2010, transfer pricing documentation duties have to be fulfilled by taxpayers. Transfer pricing documentation (Country File and Master File) must comply with certain formal and substantial requirements set out by the Italian Tax Authorities. In case the taxpayer duly prepared the transfer pricing documentation and, during a tax audit report, provide the same documentation to the Tax Auditors, no penalties could apply even in the case transfer pricing adjustments are assessed. On the contrary, if the taxpayer fails to prepare the transfer pricing documentation, in case of transfer pricing adjustments, penalties could apply.

In line with OECD BEPS recommendations, Italy implemented the Country by Country Reporting provisions.

Furthermore, Italian government is in the process of implementing the EU Directive provisions providing the automatic exchange or information of tax rulings and APAs.

Italian Tax Authorities have not officially released any official position on the Starbucks and Apple decisions, but Italian press reported that Italian Tax Authorities are focusing on the audit of digital economy multinationals.

Malaysia

Malaysia’s transfer pricing law and policy are largely modelled after the OECD Transfer Pricing Guidelines with some variations. Section 140A of the Income Tax Act 1967 is the provision that introduced transfer pricing law in Malaysia. Section 140A(2) states that where a person in the basis period for a year of assessment enters into a transaction with an associated person for that year for the acquisition or supply of property or services, then, for all purposes of the ITA, that person shall determine and apply the arm's length price for such acquisition or supply.

Meanwhile, Section 140A(3) adds that where the Director General of Inland Revenue has reason to believe that any property or services referred to Section 140A(2) is acquired or supplied at a price which is either less than or greater than the price which it might have been expected to fetch if the parties to the transaction had been independent persons dealing at arm's length, he may in determination of the gross income, adjusted income or adjusted loss, statutory income, total income or chargeable income of the person, substitute the price in respect of the transaction to reflect an arm's length price for the transaction.

The transactions or the financial assistance referred to in Sections 140A(2) or (4) respectively, shall be construed as a transaction or financial assistance between:

persons one of whom has control over the other;

individuals who are relatives of each other; or

persons both of whom are controlled by some other person.

The Income Tax (Transfer Pricing) Rules 2012 supplement the primary legislation in Malaysia. Among others, these Rules prescribe the following:

how and when to prepare contemporaneous transfer pricing documentation;

the method to determine arm’s length price;

comparability of transactions;

transfer price for separate and combined transaction;

transfer price for intra group services and cost contribution arrangement;

Advance pricing arrangement is something that is rather new in Malaysia. It is governed under Section 138C of the Income Tax Act 1967 was took effect from the year of assessment 2009. Essentially, the advance pricing arrangement in Malaysia involves an application made to the tax authority (i.e. the Inland Revenue Board) by any person who carries out a cross border transaction with an associated person. An advance pricing arrangement shall be made in the prescribed form and shall contain particulars required by the tax authority. The application of advance pricing arrangement seems to be confined to transfer pricing arrangement although no such restriction is expressed by law.

Upon receiving such application, the tax authority is empowered to:

Enter into an advance pricing arrangement with the person who carries out a cross border transaction with an associated person; or

The tax authority may enter into an advance pricing arrangement with a competent authorities may enter into an advance pricing arrangement. This is in order to determine the transfer pricing methodology to be used in any future apportionment or allocation of income or deduction to ensure the arm’s length transfer prices in relation to that transaction.

The advance pricing arrangement shall apply in respect of a transaction between:

persons one of whom has control over the other;

individuals who are relatives of each other; or

persons both of whom are controlled by some other person.

The unfortunate position is that the tax authority does not share with the public any data pertaining to the type and number of private ruling, advance ruling and advance pricing arrangement handled by them in a year. Such sharing of information would enable both businesses and practitioners to understand the tax authority’s approach in these matters and gauge their effectiveness.

Ireland

Yes Ireland operates a transfer pricing regime and it is possible (although unusual) to obtain an APA with the Irish Revenue. The Irish Revenue has published guidelines which apply to APAs with effect from 1 July 2016. Ireland's approach to APAs is to ensure these are entered into in accordance with OECD principles and will not therefore require the adoption of a new approach in light of recent decisions.

France

The FTA applies the arm’s length principle: prices applied to transactions between related parties must be similar to prices that would have been agreed upon for transactions between independent companies. If not, the FTA may presume an indirect transfer of profits from the French company to its foreign affiliate and reassess its taxable income accordingly, that is to the extent of the amount deemed to have been unduly shifted. The burden of proof regarding an indirect transfer of profits lies with the tax authorities.

The FTC provides for the possibility of a bilateral advance pricing agreement between multinational companies and the tax authorities which would aim at fixing the transfer pricing method to be used in cross-border transactions.

The State Aid action has not dramatically changed the situation, but just increased the already thorough examination of the APA requests.

Australia

Australia's transfer pricing regime was substantially reformed following the passage of the Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting Act 2013. The new provisions, contained in Subdivisions 815-B and 815-C of the Income Tax Assessment Act 1997 apply to income years starting on or after 29 June 2013. The reforms were designed to bring Australia's transfer pricing rules into alignment with international best practice. Parliament has indicated that the provisions will incorporate the guidance published in the final BEPS report published 2015. However, as at the time of writing, the law still relies on the OCED guidance published in 2010.

Somewhat controversially, as part of its reform package, the government instituted Subdivision 815-A with retrospective effect. That is, for the years 1 July 2004 - 29 July 2013, provisions incorporating the 2010 OECD guidance will be applied (in addition to the old transfer pricing analysis).

The changes recalibrate and broaden the transfer pricing analysis. Relevantly, the new provisions focus on the arm's length conditions (as opposed to a mere focus on the consideration paid) that operate as compared with the actual commercial or financial relations.

Under the old provisions, it was not possible for the Commissioner to depart from the actual arrangement contemplated. Importantly, a different arrangement could not be substituted on the basis that unrelated parties dealing at arm's length would not have entered into the arrangement. That is, where they apply, the old provisions do not empower the Commissioner to recharacterise a transaction.

The statutory language in the new provisions does not grant the Commissioner a broad ability to recharacterise any particular transaction. However, the focus on 'conditions' is a broader inquiry that recognises that parties can have dealings that are non-arm's length for reasons other than the price attributed to them. On this basis, the Commissioner may depart from the actual conditions that operated in determining whether there has been a transfer pricing benefit (see Chevron Australia Holdings Pty Ltd v. Federal Commissioner of Taxation [2015] FCA 1092 at [600]).

By way of completeness, the ATO has established an advance pricing arrangement program that allows the taxpayer to reach an agreement with the regulator on the application of the arm's length principle to international related party dealings.

Switzerland

Swiss codified tax law only contains very few rules relating to transfer pricing questions. As a general rule, the Swiss federal and cantonal tax codes state (i) that expenses of a company must be commercially justified and (ii) profits not shown in the profit & loss statement of a company must still be included in its taxable profit.

Based on these general rules, Swiss tax authorities can correct intra-group transactions which were not at arm's length. In determining, whether an intra-group transaction is at arm's length or not the Swiss (federal and cantonal) administrative tax practice generally follows the OECD Transfer Pricing Guidelines.

With respect to inter-company loans, the Swiss Federal Tax Administration publishes yearly rules regarding safe haven interest rates on loans and advances (in various currencies) between related parties. This publication thus provides for maximum rates regarding loans from the shareholders/related parties to the company and minimum rates regarding loans from the company to shareholders/related parties.

Yes, it is possible to obtain an advance pricing agreement ("APA") with the Swiss tax authorities. In general, the cantonal tax authorities are competent for granting unilateral APAs, whereas the bi- or multilateral APAs (or unilateral APAs regarding Swiss withholding tax) are negotiated with the involvement of the Swiss Federal Tax Administration.